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The fate of the $700 billion financial bailout bill is in limbo,
following today's surprising and dramatic defeat of the delicately negotiated plan in the House, by a 228-205 vote. With the Dow Jones Industrial
Average plummeting (it declined by more than 700 points), President Bush and congressional leaders vowed to bring
the package back for another vote as soon as possible  probably later this
week  but it was far from clear what they could do to make it any more
palatable.

The main reason for the defeat was opposition from House Republicans, two-thirds of whom voted against the bill, despite
the fact that it was
conceived by the Bush Administration and supported by their presidential
nominee, John McCain, who had suspended his campaign last week to return to
Washington and work on the package. By comparison, 140 Democrats, some 60% of
the caucus, voted for it.

Supporting the bill wasn't easy for lawmakers on either side of the aisle. As
the deal was being worked out last week, congressional offices were
reporting that constituent phone calls were running 100 to 1 against the
measure, which was seen across the country as a bailout of the very Wall
Street executives whose misjudgment in making and selling bad real estate
investments had spawned a credit crisis that threatens to drag down the
entire financial system.

But supporters of the plan  which had been crafted by Treasury
Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke  argued
that as painful as it would be to commit such an unprecedented amount of
taxpayer money to cleaning up Wall Street's mess, the price of not doing it
would be even greater, because the crisis would spread to hurt ordinary
businesses and their workers. Supporters of the plan argued that the only
way to keep the financial system operating was to have the government buy
the junk assets in order to take them off the balance sheets of the banks that now
hold them. Congressional leaders of both parties also negotiated changes to
the plan that were aimed at making it more politically salable, including
limits on executive compensation for the Wall Street firms that take
advantage of it and stricter oversight of the program.

Not surprisingly, given the market's quick negative response and the
general atmosphere that pervades Washington, both sides were quick to point
fingers. House Republicans charged to the microphones to blame Speaker
Nancy Pelosi for the defeat, saying that at least a dozen of their members
switched their votes because they were offended by the partisanship of a
speech she gave on the House floor. Democrats scoffed at that excuse. "Think
of this: Somebody hurt my feelings, so I am going to punish the country,"
said House Banking Committee chairman Barney Frank, a Massachusetts Democrat
who had been one of the chief negotiators of the plan.

Meanwhile, the McCain campaign  which had been taking credit for the deal,
when it appeared to be headed for passage  put out a statement blaming its
failure on Democrats, starting with Barack Obama. "Barack Obama failed to lead,
phoned it in, attacked John McCain, and refused to even say if he supported
the final bill," the campaign said in a statement attributed to economic
adviser Doug Holtz-Eakin.

Both houses of Congress had been scheduled to adjourn this week until after
the election. The defeat of the bailout plan means that everyone is likely
to be back at work later this week. The question is what the markets will do in the meantime.